Thanks to the rising price of oil and the mortgage meltdown the stock market has been what the British would call “dodgy”. There’s a lack of confidence in the ability for companies to perform and earn, and that’s driving the markets down.
But it’s not all bad news. Bear markets can bring good investing opportunities and there are numerous strategies you can employ to minimize the erosion of your portfolio and even make some money …
1. Don’t invest. A lot of investment funds are holding a larger than normal cash position right now. This is simple cash preservation and the idea is to wait out the bear; when the markets are going up, it’s because stocks in general are going up, and your chances of picking the winners are much better.
2. Go short. Shorting a stock is betting the stock will go down. You can place your bet by buying put options which is the option to sell a stock at a price in the future that you think will be higher than it will cost to buy. You can aso write call options. By writing a call, you’re giving someone else an opportunity to buy your stocks at a specific price and if the stock goes lower, the option is useless and you keep the premium (the price of the option) when it expires.
3. Finding the winners. There’s always smart money somewhere. After the dot com crash, massive amounts of capital went into property (and fueled that bubble). You want to look for those opportunities rather than focusing on the negatives; oil has been on the rise. And with it, alternative energy plays like solar have held fairly strong. Look for companies that are solving the current problems.
4. Go bargain hunting. This is probably one of the best strategies you can employ in a bear market. After all, it’s all about buying low and selling high. Companies that are holding strong against the bear or companies with low price/earnings ratios that are primed to bounce back can usually be bought at a decent discount. Also, stocks that are down while the company is still earning well and paying a good dividend can be a great investment.
There are risks to all these strategies, just as there are risks in a bull market. But using bear market strategies in a bear market is one of the keys to investing success.
And that’s no bull.